Creating two steel giants – one located in the north and another in the south, China is considering a sweeping overhaul of its steel industry through consolidation, Bloomberg reported quoting people familiar with the plan.

The sources said that while No. 2 producer, Shanghai Baosteel Group Corp., and Wuhan Iron & Steel Group Corp. will be merged into Southern China Steel Group, Hebei Iron & Steel Group, the nation’s biggest mill by output, and Shougang Group will be combined into Northern China Steel Group. Following the news, there was rise in shares in the listed units of Hebei and Shougang.

While a Baosteel Group spokesman declined to comment when reached by Bloomberg, the state-owned Assets Supervision & Administration Commission didn’t respond to a request for comment.

Enhancement of government efforts to reduce overcapacity as part of its drive to overhaul an inefficient state sector and providing of the scale to rival global giants such as ArcelorMittal would be possible from the potential combinations of these Chinese mills. Although sources said that nothing has been decided, once the large tow entities are established, smaller steel companies could later be absorbed into the two new groups.

Helen Lau, an analyst at Argonaut Securities Asia Ltd., said from Hong Kong that the plan “will help accelerate eliminating excess steel capacities”.

“It will also boost their competitiveness and strengthen their customer bases and leave little room for non-competitive smaller mills,” Lau said.

The most rise in over two weeks was noted in the shares in the listed units of Hebei and Shougang. While Beijing Shougang Co. added as much as 3.7 percent, Hesteel Co. climbed as much as 2.8 percent. As their parents discuss a restructuring, which analysts have said may presage a union, Baosteel and Wuhan’s listed units are suspended from trading.

Chen Derong, general manager at Baosteel Group, told a conference in May that the domestic market remains saturated even though China’s steel output has peaked. Sustaining a global glut of the metal and drawing fire from competitors across the globe is the aim of the country as it seeks to clear its surplus as exports are running at record levels.

According to the China Iron & Steel Association, at the end of 2015, the crude steel-producing capacity by the Chinese steel industry reached a record high with 1.2 billion tons of products. Accounting for about half of global supply of the alloy that’s used in construction, autos and appliances, the Chinese steel industry is the world’s largest steel producer. Cutting down of production capacity by as much as 150 million tons by 2020 has been promised by the Chinese government.

Since the last one year, the Chinese steel industry has also been at logger heads with the European Union and steel producers who have been protesting against the steel dumping tactics of the Chinese industry. The industry has alleged that the Chinese companies have been exporting steel at abnormally low prices in to Europe which is hurting the local producers.

(Adapted from Bloomberg)

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